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WHITE HOUSE SAYS IT EXPECTS DEFICIT TO HIT $165 BILLION

The Bush administration said today that the federal government would run a deficit of $165 billion this year, a sharp turn for the worse after four years of surpluses and further evidence of how the stock market's long slide is rippling through the economy.

Administration officials said the main reason for the swing from a $127 billion surplus in the fiscal year that ended last Sept. 30 to the projected red ink for the current fiscal year was a steep falloff in tax revenues from capital gains and other receipts associated with the stock market.

Wall Street closed out another dismal week with another down session. The Dow Jones industrial average fell 117 points today, closing at 8,684.53. Its loss for the week was 694.97 points, or 7.4 percent. The Nasdaq composite index edged down by less than a point to close at 1,373.50, bringing its loss for the week to 74.84 points, or 5.2 percent.

Consumer confidence fell to its lowest level since right after the Sept. 11 terrorist attacks, according to the University of Michigan's preliminary index for July that was released today. The index fell to 86.5, an eight-month low, from 92.4 in June.

The cascade of bad news about corporate behavior is weighing increasingly heavily on both Wall Street and Washington, where Democrats sought today to use the tumble in stock prices to argue against President Bush's plan to allow workers to invest part of their Social Security taxes in stocks and bonds. [Page A9.]

By further undermining investors' confidence, the corporate scandals are also increasing the fiscal pressure on the government. Its finances have deteriorated for a year because of the combined effects of the weak economy, increased spending on national security and the initial costs of the tax cut pushed through Congress last year by President Bush.

The fiscal squeeze has intensified during the last several months, in large part because tax revenues have dried up more than anticipated, private economists and government officials said.

The recent dropoff in tax receipts and the ensuing surge in the federal deficit is due ''almost entirely to what I will call stock market related income -- capital gains, and to a lesser extent income from mutual fund distributions, options, perhaps bonuses tied to stock performance,'' said Mitchell E. Daniels Jr., director of the White House's Office of Management and Budget. ''This is a new and I think important phenomenon we are all going to have to understand much better.''

Mr. Daniels said that the deficit for the next fiscal year, starting Oct. 1, should decline to $109 billion, and that the government could return to running surpluses two years later.

Democrats called the administration's projections overly optimistic. They said the long-term fiscal outlook remains bleak, and they renewed their argument that the root of the problem was Mr. Bush's insistence last year in pushing through a $1.35 trillion, 10-year tax cut on the basis of long-term surplus projections that were wildly optimistic.

''They have now wandered off to fantasyland and are seriously understating the deficits and the buildup of debt we are facing,'' said Senator Kent Conrad, the North Dakota Democrat who is chairman of the Senate Budget Committee.

Mr. Conrad said next year's deficit was likely to be more than $200 billion, nearly twice the administration's estimate. Senate Republicans are also projecting a deficit for next year of more than $190 billion.

Traditional economic theory holds that governments should run deficits during times of economic weakness because doing so effectively puts more money in the hands of businesses and individuals. Neither party advocates trying to close the budget gap this year or next, in part because of the economic implications.

But Democrats hope to make a case that the Bush administration has put the government on a path leading to deficits for years, perhaps decades, eventually limiting its ability to pay Social Security and Medicare benefits to the growing ranks of retirees and hurting the economy by driving up interest rates.

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Running deficits also means that the government's debt will rise, further burdening future generations. Congress already raised the legal ceiling on the national debt this year, and this week a developer restarted the ''debt clock'' in midtown Manhattan that tracks the government's liabilities, setting it at $6.1 trillion, after turning it off for two years.

Mr. Conrad said the $5.6 trillion, 10-year surplus projection the White House relied on last year in pressing for the tax cut proved to be a mirage. While last year's recession and the costs of the war on terrorism played a role, he said, the bulk of the deteriorating fiscal outlook over the long run was attributable to the administration's emphasis on tax cuts.

''The markets are voting every day on the credibility of this economic team, and they're giving a thumbs-down to this economic plan,'' Mr. Conrad said.

But Democrats have not offered deficit-reductions plans of their own, and most have shied from advocating a repeal of Mr. Bush's tax cut or delaying the provisions that phase in over the rest of the decade.

The administration's presentation of the new budget numbers did not dwell on the long-term outlook, but focused instead on the short term. It pointed to the stock market as the immediate problem, and asserted that the key to maintaining fiscal responsibility was for Congress to hold down government spending.

Mr. Daniels said that the administration's projection of a return to surplus in 2005 makes room for increased spending on national security as well as for other issues like health care. ''But it also contemplates real restraint in spending in the rest of the budget, and that's the biggest if,'' he said.

In the budget analysis it released today, the administration said it expected total revenue for the current fiscal year to decline by $124 billion, or 6 percent, from last year's level.

Nearly all of the decline -- $121 billion, it said -- would come from individual income tax receipts. And, it said, most of that decline was within the ''non-withheld payments'' category, which is largely made up of capital gains taxes.

Through May, the administration said, non-withheld payments were down by $80 billion, or 28 percent, from the same period a year earlier.

Mr. Daniels said that the administration was not making any specific assumptions in its projections for next year about a recovery in the stock market. But he said its projections assume an overall increase in tax revenues of 5 to 6 percent.

Democrats said the assumption that the budget could be rebalanced by 2005 was built on unrealistic economic projections. Representative John M. Spratt Jr. of South Carolina, the senior Democrat on the House Budget Committee, noted that the administration assumed, without any explanation, very large jumps in corporate profits in 2004 and 2005.

''It's a critical detail,'' he said, ''and it shows you why we're skeptical, to say the least, about the numbers they've presented.''

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A version of this article appears in print on July 13, 2002, on Page A00001 of the National edition with the headline: WHITE HOUSE SAYS IT EXPECTS DEFICIT TO HIT $165 BILLION. Order Reprints|Today's Paper|Subscribe